Professional Options Trading Course

Lesson 8: The Bear Put Spread

Adam Khoo Bang Pham Van

Professional Trader Options Trader & Specialist

www.piranhaprofits.com
www.wealthacademyglobal.com
Strategy 7: Bear Put Spread

When to Deploy:
• Bearish with a Target Price
• Low Risk, High Reward

Optimal Technical Pattern

• Low Momentum Stock Where…
• Price Breaking Down from Consolidation
• Price Bouncing off Resistance on a downtrend

Bear Put Spread Bear Put Spread

 Bear Put Spread Versus Long Put
Disadvantages of Buying a Put Option
• Relatively Expensive
• Stock Price Has to Move below “Strike Price - Premium” to Break Even at Expiration
• Risk of Time Decay
• Put Option Premium Falls Daily
• Risk of Implied Volatility Falling
• If IV Falls, Your Put Option Premium Declines

A Bear Put Spread Reduces/Eliminates these Risks

• Bear Put Spread = Buy a Put at One Strike Price and Sell a Put at a Lower Strike Price, with the
same Expiration Date

• Example: Bearish on XYZ Stock at $49.50

• Buy a Put (e.g. 50 Strike) @ $1.50 = -Debit $150 Right to Sell Stock at $50
• Sell a Put (e.g. 45 Strike) @ $0.50 = +Credit $50 Obligated to Buy at $45
• Net Premium = -$100 Debit

• The Put Spread Reduces Your Cost, Increases the Breakeven price but Limits Your Potential Profit
• Buying a Put (Theta works against you, Decline in IV works against you) and Selling a Put (Theta
works in your favour, Decline in IV works in your favour) reduces the Theta and IV Risk
 Bear Put Spread
Example: Bearish on AGIO at $51.93. Target Price $40
• Long 1 Contract AGIO March 55 Puts at $6.90
• Short 1 Contract AGIO March 40 Puts at $1.38
• Net Premium = -$6.90 + $1.38 = -$5.52
• Maximum Risk = $5.52 x 100 shares = $552
• Breakeven Price (At Expiration)
= Long Strike Price - Net Premium = $55 -$5.52 = $49.48
 Bear Put Spread
Example: Bearish on AGIO at $51.93. Target Price $40
• Long 1 Contract AGIO March 55 Puts at $6.90 Bear Put Spread 55/40
• Short 1 Contract AGIO March 40 Puts at $1.38 Net Premium $5.52

1 Contract Bear Put Spread 55/40

Profit

Max Profit= +948

Risk-Return Today

Stock
$40 $49.48 $55 price

Max Risk= -$552

Risk-Return at Expiration
Breakeven Price (Long Strike - Premium) = $49.48
Max Profit at Expiration = Long Strike - Short Strike - Net Premium
Loss = ($55 - $40 - $5.52) x100 shares = $948
Risk to Return Ratio = $948/ $552 = 1.7
 Exercise – Buy a Bear Put Spread
Trade Setup:
• There is a Bearish setup on CAR
• CAR is trading at $26.23. Your Target Price is $21
• You want to buy a Bear Put Spread

Current Price $26.23

Target $21
 Exercise – Buy a Bear Put Spread
Trade Setup:
• There is a Bearish setup on CAR
• CAR is trading at $26.23. Your Target Price is $21
• You want to buy a Bear Put Spread
• Long CAR March 27 Put at $ ______ (Debit)
• Short CAR March 21 Put at $ ______ (Credit)
• What is the Net Premium for this Trade $ ____________ ( Net Debit)
 Exercise – Buy a Bear Put Spread

1. What is Your Maximum Risk?

- Maximum Risk is __________ (Net Debit)
2. What is your break-even point at Expiration?
(Long Strike - Net Premium)
- Break-even is _______________________________
3. What is Your Maximum Profit at Expiration?

(Long Strike Price – Short Strike price – Net Premium)
- Maximum profit = ____________________________
4. What is the Risk to Return Ratio for this Trade? (Max Profit/ Max Loss)
____________
5. Draw the Risk to Return Graph showing the maximum risk, breakeven at
expiration and Maximum Profit
 Bear Put Spread
CAR Current Price $26.23
• Long 1 Contract CAR March 27 Put at $____
• Short 1 Contract CAR March 21 Put at $____ Bear Put Spread 27/21

1 Contract Bear Put Spread 27/21

Profit
Risk-Return at Expiration

Max Profit= +____

$____ Stock price

$___ $___
Max Risk= -_____

• Breakeven Price (Long Strike - Net Premium) = $______

• Max Profit at Expiration = Long Strike - Short Strike - Net Premium
= ___________
Loss • Risk to Return Ratio = Max Profit/ Max Loss = ________
 Advantage and Risks of Bear Put Spreads
Advantages (Versus Long Put) :
• Lower Cost of Trade & Lower Risk
• Higher Breakeven Price
• Less Affected by Time Value Decay and Volatility Crush
• Higher Probability of a Profitable Trade

Disadvantages of Bear Put Spread

• Maximum Profit is Capped to the Short Strike Price
• Maximum Profit is Derived only At Expiration

Profit
Profit
+$405

Stock price
Stock
$24.62 price $25.05
-$195
-$238

Loss Loss
 Steps to Long Bear Put Spread
1.Identify a Bearish Trade on a Stock, Index or ETF
• (See Lesson on Technical Analysis)
2.Check the Option Chain
• Choose Date to Expiration - At least 30 Days is Ideal
• Choose Long Put Strike Price
• I prefer Delta (0.5-0.6) ATM or 1 Strike ITM
• Choose Short Put Strike price
• Strike Price is Your Target Price. At least $5 below Long Strike
• Choose Quantity (minimum 1 Contract = 100 Shares)
• Total Premium should be < 2% of Your Net Liquidation
3.Analyse your Risk- Return Profile
• Check your potential loss or profit at different prices, 15 days to
expiration and at Expiration
• Ensure Maximum Profit/ Maximum Loss = 1.5 or Better
4.Ensure Bid/Ask Spread of Options not more than $0.40-$0.50
• Buy the Vertical Combo Long Put/Short Put
• Place a Limit Order at Mark When the Market is Open
 How to Exit a Bear Put Spread
Scenario 1: Stock Price Reaches or Exceeds Target Price
i.e. Short Strike Price
• Close the Bear Put Spread (Sell the Long Put and Buy the Short Put)
• At Expiration, You Will Earn the Maximum Profit
• Anytime before expiration, the Profit will be lower than the Maximum

Scenario 2: Stock Price is Between Long and Short Strike Price

• If the stock price is below the Breakeven price, close the Bear Put Spread just
before expiration (i.e 7 days) to maximise the profit
• If the stock price is above the Breakeven price 7 days to expiration, close the
Bear Put Spread for a loss.
 How to Exit a Bear Put Spread
Scenario 3: Stock Price Moves Above Long Strike Price
• Close the Bear Put Spread when you hit 50% of the Maximum Loss
• Close the Bear Put Spread when Stock Price is No Longer on a Bearish Downtrend
• UptrendSignal (20EMA cross above 40EMA) or
• Price moves below above Swing High or
• Price moves 1 ATR Above Resistance Level / Moving Average Resistance
Professional Options Trading Course
Lesson 8: The Bear Put Spread

Adam Khoo Bang Pham Van

Professional Trader Options Trader & Specialist

www.piranhaprofits.com
www.wealthacademyglobal.com